How To Budget Your Money

How To Budget Your Money
Photo by 401(K) 2012 – CC BY-SA 2.0

Budgeting, if done right and followed closely, can guarantee the availability of money in the future when its needed and/or wanted. When it comes to money, most of us will never run out of ways to spend it. Sure, we may not have any problems with taking money out of our pockets, but what about keeping it in our pockets for a rainy day?

A well-planned budget allows one to see his or her expenditures, where cutbacks in said expenditure can be made, and if extra expenditure can be afforded. Without having a detailed budget, someone who is clueless over how much s/he is spending in comparison to how much s/he is earning can face serious monetary issues in the future. This lack of understanding and monetary control can lead to overspending, debt problems, and the inability to secure the stability of ones future.

New to budgeting? Dont worry; the following steps will help guide you through budgeting your money.

Step 1: Identify Your Income and Expenses

List out all your net income sources, including wages (after subtracting taxes), pensions, child and/or spousal support, commissions, etc. After doing so, record your expenditures. Start off by listing all the fixed expenditures you have bills, subscriptions (including gym, magazines, newspaper subscriptions, etc.), rent and/or mortgage payments, car payments, and even money deposited into a family members bank account. Follow by adding in the rest of your expenditures you may need to refer to bank/credit card statements to accomplish this. Keep this as detailed as possible, specifying what in particular it is that you have spent money on.

Record your monthly income and expenditures for as many months as you are able to, ideally for 12 months. Categorize your expenditures into categories such as housing expenses (mortgages, rent, taxes, bills, insurance, etc.), personal expenses (clothing, recreation, entertainment, eating out, travel, etc.), living expenses (groceries, health care, insurance, transport, etc.), work expenses (supplies, professional dues, etc.), and other payments (loans, child/spousal support, etc.)

Step 2: Set Goals

These goals will vary depending on the individual, and can range from short-term to long-term goals. Examples include paying off a debt, setting out some savings for retirement, purchasing a new car, or going on holiday at the end of the year.

Step 3: Separate Needs from Wants

Take a look at your expenditure record. Mark out what you have purchased that is a necessity or an essential item/good (e.g. Pens and notebooks for school), and similarly mark out items that are not essential goods (e.g. Two identical pairs of shoes in different colors). If possible, note down impulse expenditures these are examples of unplanned spending, and can be easily removed when incorporated into your budget.

Step 4: Establish Your Budget

The basic rule of a budget is that expenditures cannot exceed income. Take a look at the detailed list of where your money is going, and make revisions to the initial amount that is going into each area of expenditures. As you do this, again, make sure that total expenditure does not exceed total income.

This step requires you to take into account your goals that you have listed in Step 2. Deductions from your expenditures should be planned in direct relation to how much money and time you have and require to meet your goals.

If cutting back drastically seems challenging, start by trimming a small amount off of each category and increasing the amount gradually. Additionally, you may consider the 50/30/20 guideline: put aside 50{8e6cf663dd8bbfda1f4fdd38af84969e57c1756d87f56947f5c326d1d8b26fdc} of your net income towards fixed payments, 30{8e6cf663dd8bbfda1f4fdd38af84969e57c1756d87f56947f5c326d1d8b26fdc} towards personal/day-to-day expenditure, and 20{8e6cf663dd8bbfda1f4fdd38af84969e57c1756d87f56947f5c326d1d8b26fdc} towards achieving your goals.

Seasonal expenditures (e.g. Christmas gifts), can be managed under a different budget. Use the balance in your savings account as a starting point, and deduct seasonal expenditures from it whenever they occur. These expenditures are not regular, and should only appear occasionally as a subtraction from your savings account.

Step 5: Act on Your Budget Plan

A budget plan will depend on how often you receive your wages (e.g. Every two weeks or monthly). When you receive your wages, record the net amount and plan out what and when each category of expenditures (amount taken from the revised total that you have decided on) will be paid off. Start with payments that have a fixed date (e.g. Utility bills). Dont forget to set aside money for day-to-day usage as well. At the end of each cycle, total up your net balance and add that to your savings account.

If you are an individual with irregular income, you can either 1) divide your total net income over the past 3 years by 12 [months] and use that as a guide to build your budget, or 2) set up a holding account where your income, whenever you receive it, is deposited into it, and a fixed amount is payable to you every month regardless of the change in your accounts balance.

Step 6: Regularly Monitor and Evaluate Your Budget Plan

A newly established budget will need consistent monitoring over the first few months in order to ensure that it runs smoothly. For the first year, review your budget monthly and check to see if all the information and numbers are accurate. The effectiveness of the budget should also be considered are you making good progress towards your goals? If not, tweak your budget and continue monitoring it for the next few months. Repeat as needed, and if the budget still fails to work, consider seeking out professional advice.

Summary

Aside from creating a good budget plan, the other crucial aspect to successful budgeting is sticking to the budget. You may find sticking to a budget uncomfortable in the beginning, but as you get used to it and start to see the benefits, everything will slowly fall into place. Before long, youll start to cross off goals from your list, and your future self will be thanking you.

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